Gold smuggling back on track as cash availability improves
Gold smuggling had taken a back seat after the demonetisation announcement on November 8, as cash availability was hit. With the latter situation reversing, smuggling has also increased.
According to GFMS, the research and consultancy company for precious metals, supply of smuggled gold came under stress between November 2016 and mid-March of 2017. Supplies from this source were estimated at close to 1.3 tonnes a week in the four quarter of 2016, rising to 1.9 tonnes a week in the first quarter this year. This means eight to 10 tonnes a month is entering India through ‘unofficial channels’.
Market inquiry shows the ‘havala premium’ for getting dollars unofficially (required to finance gold smuggling, by paying unaccounted cash in India) was 5.6-6 per cent in December but is now the normal three per cent, making smuggling attractive. When payments were high, inflows were happening because smugglers wanted to keep alive the chain they had set up, explained a market source.
Sudheesh Nambiath, lead analyst for precious metals at GFMS, said: “The increased availability of cash has reduced the stress for this part of the trade. However, we see room for growth as very limited, due to the cash transaction limit of Rs 300,000, which naturally creates a fear of being caught when using cash above this limit. Nevertheless, this is currently more popular in tier-3 cities than in tier-1 cities.”
Gold smuggling has been on the rise after the government increased the import duty on it; in phases, it had raised this to 10 per cent by 2013. Since then, smuggling has been in the range of 150-200 tonnes a year. However soon after demonetisation, the dollar havala premium surged and the dollar was not available in the black market as old currencies were withdrawn, while new currency notes were hard to get for even routine expenses.
GFMS quoted Reserve Bank data to show that currency with the public was on the rise after January. And, in April, was higher than bank demand deposits, indicating more cash on hand than in banks.
Indian jewellery consumption, it added, increased by 46 per cent in the first quarter of 2017 to 107 tonnes, the highest year-on-year gain since the third quarter of 2014. Last year, the same period was the lowest since the second quarter of 2009, a period clouded by the impact of drought, resulting in lower spending, in addition to excise duty and the strike by jewellers in March.
With the goods and services tax being implemented from July, jewellers have stocked gold and brought these on their books, one reason for increased import in the March quarter. Nambiath said, “Imports in the second half of the year will be highly dependent on end-consumption and not retailer stocking.”